UBS Predicts Year-End Rally for US Equities

UBS has noted that "conditions are aligning" for a seasonal year-end rally in US equities, despite some persisting risks.

With the US election approaching, uncertainties surrounding it, along with various economic factors, could lead to stronger markets in November and December, typically favorable months for the S&P 500.

The outcome of the election remains uncertain, but according to Jason Draho, Head of Asset Allocation at UBS, the resolution of this uncertainty and reduced volatility could positively impact markets in the short term.

Whether the result is a "red sweep" or a divided government, decreased implied volatility may encourage risk-taking as investors find a clearer landscape.

UBS’s outlook also aligns with the stable footing of the US economy. Recent data has suggested a soft landing, with job growth displaying resilience amid challenges like hurricanes and labor strikes.

Consumer spending has remained robust, contributing 2.5 percentage points to third-quarter GDP growth. This momentum is likely to continue, potentially supported by the resolution of election-related uncertainties.

Another supportive factor is the Federal Reserve, which UBS refers to as having a "put" on the market, signaling that rate cuts could cushion any economic downturn.

Markets currently anticipate a 98% likelihood of a 25 basis point rate cut in November, with another possible cut in December. Nonetheless, UBS warns that this second cut is less certain, as significant economic data will be released before the meeting.

Draho emphasized, "Perhaps the most important consideration affecting a year-end rally is that the jobs data was a reminder that the Fed 'put' is alive and will be activated on any weakness."

Globally, fiscal and monetary policies outside the US are also likely to contribute to market momentum. For instance, China is expected to soon announce further fiscal support, contingent on US election outcomes, especially if tariffs are reinstated under a Trump presidency.

Other central banks might join the global trend of rate cuts before the year concludes, boosting market sentiment further.

Currently, investor positioning looks balanced; UBS mentioned that "investors have de-risked" ahead of the election. This positions the market well for possible gains if the election results meet expectations, encouraging investors to increase risk and pursue a rally.

However, several risks continue to concern UBS. Delayed election results could hamper the rally, echoing the uncertainty faced during the 2000 US presidential race. Moreover, worries about labor market weakness or inflation may challenge the soft-landing narrative. A temporary budget deal expiring on December 20 raises concerns about a potential government shutdown, which could induce volatility, but UBS believes investors might largely downplay this risk.

According to UBS, "conditions are aligning for the normal seasonal rally, although one is far from assured."

The election is anticipated to act as a "risk-clearing event," with economic fundamentals, policies, and investor positioning driving markets higher.

For equities, this could indicate further diversification of performance that began earlier in the fall. Even if a year-end rally does not occur, prevailing conditions and the AI theme instill confidence in higher market movements over the coming year.